Understand the strategies we use.
Clear, plain-English definitions and risks for two core income strategies: naked puts and covered calls.
What it is
A naked (uncovered) put is a moderately conservative options strategy that can deliver returns above the market, especially in flat to down markets. It involves selling a put option without owning or shorting the underlying stock. The goal is for the stock to close above the strike price on expiration; if it does, the seller keeps the premium. If the stock closes below the strike on expiration, the seller is assigned 100 shares per contract at the strike price. Traders generally sell out-of-the-money (OTM) puts on stocks they’d be happy to own at lower prices.
What to consider
Downside risk is similar to owning a stock without a stop-loss. If the stock drops significantly, you must buy 100 shares at the strike, which can create a paper loss. Because selling the put creates an obligation to buy, it’s critical to maintain sufficient cash to cover potential assignment.
What it is
A covered call is an income strategy that often outperforms in flat to down markets. For every 100 shares you own, you sell one call option. If the stock closes below the strike on expiration, you keep the premium and your shares. If it closes above the strike, your shares are called away at the strike price—you keep the premium and any appreciation from your purchase price up to the strike. Covered calls suit investors seeking income with a neutral to modestly bullish outlook.
What to consider
The primary risk is opportunity cost: upside is capped at the strike price. While the call is open, you generally cannot place an effective stop-loss on the shares, so downside risk from stock depreciation remains similar to owning the stock outright without a stop-loss.
Disclosures: Educational content only—not individualized financial advice. Options involve risk and may not be suitable for all investors. Past performance does not guarantee future results.